Tax-efficient remuneration strategies for owner-managed businesses

Running a successful business is about more than generating profits. It’s also about making informed decisions on how those profits are extracted.

For owner-managed businesses, remuneration planning is one of the most effective ways to improve tax efficiency. Yet it’s an area that’s often overlooked, with many business owners continuing the same approach year after year without reviewing whether it still reflects the current tax landscape or their personal circumstances.

There is rarely a one-size-fits-all approach to remuneration. The right strategy will depend on your business, your personal finances and your long-term objectives. Understanding how salary, dividends, pension contributions and benefits are taxed can help you maximise the value you take from your business.

Salary: an important starting point

Although many business owners focus on minimising salary, it remains an important part of an overall remuneration strategy.

A salary can:

• Reduce your company’s Corporation Tax liability, as it is generally an allowable business expense.
• Help build entitlement to certain state benefits, including the State Pension, where the relevant National Insurance conditions are met.
• Provide a regular and predictable income.

However, a higher salary isn’t always the most tax-efficient option. As earnings increase, Income Tax and National Insurance costs can become significant. The aim is to find the right level of salary as part of your wider remuneration strategy.

Dividends: rewarding shareholders from company profits

For directors who own shares in their limited company, dividends often form an important part of remuneration.

Unlike salary, dividends are not subject to National Insurance contributions. However, they can only be paid from available distributable profits after Corporation Tax, must be declared correctly and are taxed differently from employment income.

While dividends can offer tax advantages, they are only one part of the wider picture. The right approach depends on factors such as your taxable income, company profitability and future plans.

Pension contributions: combining tax efficiency with long-term planning

Employer pension contributions can be an effective way for owner-managed businesses to extract value while investing for the future.

Where the relevant tax rules are met, they are generally:

• Deductible for Corporation Tax purposes.
• Free from employer and employee National Insurance contributions.
• Not treated as taxable income for the individual when paid into the pension.

Pension contributions can support long-term financial planning while offering potential tax efficiencies. However, annual allowances and other limits should always be considered before making significant contributions.

Benefits in kind: choosing the right benefits

Benefits in kind can add genuine value to a remuneration package when selected carefully.

Examples may include:

• Electric company cars.
• Private medical insurance.
• Mobile phones provided under the relevant tax rules.
• Trivial benefits that qualify for HMRC’s exemption.

However, not all benefits receive favourable tax treatment. Some can create additional tax liabilities, so they should form part of a wider remuneration review rather than being considered in isolation.

Why there isn’t a one-size-fits-all solution

No two business owners have identical circumstances, which is why remuneration planning should be tailored to your individual goals.

Factors we typically consider include:

• Company profitability and cash flow.
• Personal income from other sources.
• Pension and retirement planning.
• Whether profits should be extracted or retained within the business.
• Wider financial objectives.

Tax rules and business circumstances change over time, so a strategy that worked previously may no longer be the most effective approach today.

Don’t wait until year end

One of the biggest mistakes we see is businesses only reviewing remuneration at year end, when options may be more limited.

Regular reviews allow you to respond to changes in profits, cash flow and personal circumstances, ensuring your remuneration strategy continues to support your wider goals.

How Verallo can help

At Verallo, we work closely with owner-managed businesses to review remuneration strategies in the context of the wider business. Whether you’re considering how best to extract profits, planning for retirement or preparing for future growth, we can help you build a strategy that’s appropriate for your circumstances and remains effective as tax rules evolve.

To speak with our experts, get in touch by emailing info@verallo.com or calling 0203 912 9933.